A Dozen Essential Finance Lessons to Teach Your Teenager
Gaps in financial education are leaving many teenagers unprepared for managing their money and becoming independent. The good news is that most teenagers are eager to learn and understand the importance of mastering their money. As a parent or guardian, you play a crucial role in filling these gaps and equipping your teen with the financial savvy they need for the future.
While some personal finance is taught in schools, it is often sporadic. Alarmingly, just 4% of 17 and 18-year-olds have a dedicated personal finance class. With many young people already feeling anxious about money, it’s no wonder that 72% want more financial education in schools, rising to 85% among older teens.
Schools play an essential role, but passing on vital money lessons at home is just as important. Here are a dozen key areas to focus on when teaching your teenager about money and finance:
1. Budgeting
Teaching your teenager to budget is fundamental for financial stability. A budget helps distinguish between essential and discretionary spending, ensuring that necessary costs are covered and financial goals are achievable. Reviewing household expenses together can provide insight into prioritising spending. Giving teens financial responsibilities, like paying for their mobile phone or a sports club, can help them practice budgeting early and develop positive money habits.
2. Understanding Student Loans
Choosing whether to attend university is one of the first major financial decisions many teenagers face, often requiring student loans to cover tuition and living expenses. Over a third of teenagers don’t know how student loans work, which can impact their financial future for decades. It’s crucial to explain the repayment terms, income thresholds, and the long-term implications of student loans.
3. The Power of Saving & Investing
Encouraging a habit of saving and investing can set your teenager up for long-term financial security. Discuss why saving and investing is important, whether for an emergency fund or a future purchase and how to start. Highlight the benefits of interest accumulation and asset growth and explain different types of bank accounts (current and savings), investment products (such as ISAs) and pensions and the benefits and drawback of each. Understanding the concepts of saving and investing can help teens appreciate the value of delayed gratification and financial planning.
4. Demystifying Taxes
As teenagers enter the workforce, understanding how Income Tax and National Insurance deductions affect their take-home pay is essential. Despite the complexity of tax affairs, teaching the basics can empower them to manage their finances better. Explain the PAYE system and how taxes are calculated, ensuring they understand their responsibilities and the impact on their income.
5. Differentiating Between Good and Bad Debt
It’s never too early to discuss debt with your teenager. While borrowing from family or friends is common, more concerning is the use of payday lenders or loans among teens. Teaching them about responsible borrowing, interest rates, and credit scores can help them make informed decisions. Highlight the differences between good debt, like student loans or mortgages, and bad debt, such as high-interest credit cards or payday loans.
6. Recognising Financial Scams
Teenagers are increasingly targeted by scammers, with 29% reporting attempts via fraudulent emails, calls, or texts. Educating them about common scam tactics and the importance of protecting personal information can reduce their risk of falling victim to fraud. Teach them to recognise red flags and understand the dangers of sharing sensitive information.
7. Navigating Mortgages
Homeownership might seem distant to teenagers, but understanding the basics of mortgages can prepare them for future financial commitments. Discuss the importance of saving for a house deposit and how mortgage repayments work. Early education on this topic can help them set realistic goals and start saving for significant milestones.
8. The Benefits of Early Pension Contributions
Auto-enrolment means most employees start contributing to a pension from age 22, but young workers often underestimate its importance. Explain the advantages of early pension contributions, including employer matches and compound growth over time. Demonstrating the long-term benefits can discourage them from opting out of workplace pensions and encourage proactive retirement planning.
9. Building and Maintaining a Good Credit Score
Understanding the concept of credit and how to build a good credit score is crucial for financial independence. Teach your teenager the importance of responsible credit card use, making timely payments, and the factors that influence their credit score, such as credit history and the length of credit history. Emphasising the long-term benefits of a good credit score, including better loan terms and lower interest rates, can help them make informed decisions when it comes to borrowing.
10. The Value of Negotiation Skills
Negotiation is a vital skill that can have a significant impact on various aspects of financial life. Teach your teenager the art of negotiation, whether it’s for a job salary, buying a car, or even everyday purchases. Understanding how to negotiate can help them save money, secure better deals, and advocate for themselves in various situations. Highlight the importance of research, preparation, and knowing their worth, as well as the importance of being respectful and reasonable during negotiations. Developing strong negotiation skills can lead to better financial outcomes and empower them to make informed decisions in their personal and professional lives.
11. The Importance of Financial Independence
Encouraging your teenager to pursue financial independence is vital for their personal growth and self-esteem. Discuss the value of earning their own money, whether through part-time jobs, freelancing, or internships. Teach them about budgeting their income, managing expenses, and the importance of saving for both short-term needs and long-term goals. Financial independence fosters responsibility and empowers them to make their own financial decisions, helping them transition smoothly into adulthood.
12. Setting and Achieving Financial Goals
Goal-setting is a key component of financial literacy. Help your teenager identify their financial goals, whether it’s saving for a major purchase, university, travel, or building an emergency fund. Teach them how to set SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals and develop a plan to achieve them. This lesson includes understanding the importance of tracking progress, staying motivated, and adjusting plans as necessary. Encouraging goal-setting helps teens develop a proactive approach to managing their finances and prepares them for future financial challenges.
Summary
Financial education is crucial for preparing teenagers for independence and financial stability. By focusing on these essential finance lessons, you can equip your teen with the knowledge and skills they need to navigate the financial world confidently. In addition to imparting these lessons, consider building a financial safety net for your children or grandchildren to help them achieve significant milestones and ensure their long-term security.
If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.
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Disclaimer
The content of this article is for information purposes only and does not constitute a personal financial recommendation. You should always speak to a regulated financial planner before taking financial advice. This article is intended for UK residents only. All information correct at time of publication.
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